Why Woolworths isn't throwing in the towel on Australia yet

Woolworths says it is not ready to throw in the towel on its Australian operations.

Even though sales at both David Jones and Country Road were already weak before the lockdown began in Australia – David Jones sales were up 0.5% in local currency in the nine weeks preceding the lockdown while Country Road grew is sales by just 1.7% – Woolworths Group CEO, said the retailer remains committed to both brands.

"David Jones and Country Road Group are iconic brands in Australasia, with rich heritage, and with whom our customers have strong emotional connections," he said in response to Fin24's questions. Bagattini was appointed CEO in February this year, replacing Ian Moir, who drove the expansion into Australia during his ten years at the helm.

Woolworths announced earlier in the week that it is looking to fund its Australian operations to the tune of R1.1 billion to survive the impact of Covid-19. Bagattini said the recent trading update on both Australia and Woolworth's African operations is nothing more than a reflection of the tough and unprecedented trading conditions that have dramatically impacted the retail sector globally.

But Lulama Qongqo, investment analyst at Mergence Investment Managers, disagrees.

Covid-19 has magnified the group's weaknesses

"To be honest, things at Woolworths have been so bad since it came to Australia. David Jones has been struggling despite all efforts," said Qongqo.

She said the writing has been on the wall for some time that Woolworths should maybe give up on the Australian market. That the retailer is again planning to inject money from its South African operations to prop up its operations in Australia would come as a negative surprise to investors. 

"What the coronavirus has done is expose a lot of the company's vulnerabilities," she said, adding that the group's fashion, beauty and home division in SA and the rest of Africa was underperforming well before Covid-19 disrupted the global retail sector.

Woolworths has exited both Nigeria and Ghana, and although the company does not report the number of stores in the remaining 11 sub-Saharan Africa countries, it has been closing unprofitable spaces in all its jurisdictions.

Food is keeping the candle lit

The contribution of the group's clothing, beauty and home businesses to its revenues and profits has been overtaken by its food business. In the six months to December 2019, Woolworths Food generated R1.1 billion in revenue, compared to R834 million in what was traditionally the core of its operations,  Woolworths Fashion, Beauty and Home (FBH). The retailer reported that even Black Friday specials failed to attract consumers, resulting in a "disappointing" performance for the fashion business.

Qongqo said Woolworths Foods is the division that's keeping the candle lit right now. If Woolworths were to separate it from the rest of its business, the vulnerability of the other businesses would be magnified.

"The reason that people walk through the stores and buy other items is because they need to be there to buy food. The Australian balance sheet is already weak. So sadly, what's left is for the Food division to carry all rest of the business, all four of them," she said.

It might make sense for the food division to receive most of the group's investment at the moment, as opposed to giving more funding to Australia.

Repositioning Australia

But Bagattini said the rationale for providing more financial support to Australia after years of write-downs in the group's stake in David Jones' is that it wants to reposition itself in the premium segment. The company will start by reducing store sizes and close underperforming ones.

"We have previously communicated that we are anticipating reducing our store network in David Jones by 20% over the next 5 years and we ideally would want to reduce space in excess of this. While we will have fewer stores, the experience for customers in our stores will be dramatically enhanced and consistently elevated in line with our premium positioning," said Bagattini.

With a shrinking contribution from its fashion business in Africa, the stakes are certainly high for the retailer's recently appointed CEO to get this latest attempt at repositioning itself in Australia right.

The market hasn't been too supportive of the group's plans for a turnaround of its Australian operations, judging by a 70% fall in the company's stock price over the past five years. The JSE All Share Index, in comparison, has weakened more than 10%.

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